Bond restructuring key to restarting Panama Canal project

New cash infusions and a restructured performance bond agreed to last week to settle a contract dispute will jump-start the stalled construction of the Panama Canal expansion and enable the contractor to quickly exceed previous production levels, Canal Authority Administrator Jorge Quijano told reporters Friday during a conference call.
The Panama Canal Authority (ACP) hopes to make up ground lost during the bitter two-month standoff with Grupo Unidos por el Canal, which sought reimbursement for $1.6 billion in cost overruns it claimed wiped out cash reserves, and made it difficult to pay contractors and suppliers building a new set of locks on the waterway's Atlantic and Pacific entrances. The international consortium -- Sacyr Vallehermoso, S.A. (Spain), Impregilo, S.p.A. (Italy), Jan de Nul Group (Belgium, dredging specialist), and Constructora Urbana, S.A. (Panama) -- since December has laid off workers and dialed back work to a quarter of the normal pace, until finally shutting down for a brief period three weeks ago when negotiations reached a dead end.
But the delays will still push back the project's completion, now estimated for December 2015. The original completion date of October 2014 had already slid to June 2015 because of poor weather and a bad batch of concrete that the Panama Canal Authority rejected. That means the earliest large vessels can use the expanded locks is late in the first quarter of 2016. Ocean carriers have recently begun to deploy container vessels with three or four times the capacity of vessels that can currently fit through the Canal because the extra cargo lowers their per unit costs and makes voyages more profitable. Larger bulk and car/truck vessels are also entering service.
Ship owners and operators want to be able to run the larger ships through the Canal as soon as possible.
Quijano said the maritime industry has taken an understanding attitude toward the situation.
"I'm not concerned at all with how we are perceived by our customers because we have been very transparent. The comments that I’ve received have been very supportive. We are very conscious of how we impact others because we are part of the maritime transportation chain," he said.
Under the schedule agreed to by the two sides, GUPC will deliver the 12 remaining lock gates from Italy in three stages between July and December.
Construction is continuing this week, but will really pick up once the final agreement is signed Thursday, Quijano said.
He reiterated that ACP did not give into GUPC's demands for more money, and that the agreement simply lays out the schedule for proceeding with work and provides financing assistance while the sides try to resolve billing liability on a separate track. GUPC must still go through the in-house claims and dispute resolution processes, and can appeal any decisions it doesn't like to arbitration at the International Chamber of Commerce, he said.
Under the agreement, ACP will advance another $100 million to GUPC (which is also committing $100 million of its own) and extend the repayment deadline for $784 million in previous loans, possibly until 2018. That's possible because the contract includes three additional years of maintenance for the locks after the project is delivered, with possible extensions beyond 2018. Quijano said the current payment moratorium has been extended until the end of 2015, which will be extended to 2016 upon successful delivery of the locks and to 2018 if the entire project is successfully completed.
The key to the deal, Quijano explained, is the decision to relinquish immediate claims to the $400 million performance bond issued by Zurich North America so the money can be deposited in an escrow account audited by ACP to help pay for ongoing operational expenses.
"If this didn't work out [with Zurich] we would have had to get another contractor," he said.
The combined delays have added $300 million to the cost of the $5.2 billion project, Quijano said. ACP has already paid invoices for $160 million in extra costs to cover escalation prices for steel and other supplies, as allowed by the contract. GUPC is already on the hook for $54 million in penalties for not completing the locks by the Oct. 21, 2014 due date.
Quijano said ACP will have to put in its own claims through the dispute resolution process for the lost toll revenue caused by the delays.
The deal with GUPC puts the Canal expansion back on track, but Quijano is not completely confident that future problems will not arise.
"The plan is totally feasible. But I’m always very cautious because the relationship with this contractor has not been very good," he said.